Nvidia continues its winning streak and Salesforce reports earnings after the close

Key takeaways

• Nvidia up 10% in earnings
• First quarter results are coming to an end
• Stock valuations are stretched

Stock markets started the holidays with weak results from a hot streak. Both the S&P 500 and Nasdaq Composite have posted gains for five consecutive weeks, making May the best month of 2024. Although Tuesday was relatively quiet, with the Nasdaq gaining 0.6%. Meanwhile, the S&P 500 was flat on the day but still up more than 5% this month and 11% for the year.

Earnings season is almost over, so it looks like it’s going to be a very strong quarter. First-quarter earnings are expected to increase 6% year-over-year, according to FactSet. The best performing sectors are communications services, utilities, information technology and consumer staples. At the other end of the spectrum, the energy, healthcare and materials sectors saw year-over-year declines.

One thing that really impressed me this quarter was the ongoing narrative around artificial intelligence (AI). Of course, Nvidia is a company that stands out in this space. The company’s stock has seen astronomical growth over the past year and is up 10% since its latest financial results were released. Besides Nvidia, 199 of S&P’s 500 companies mentioned artificial intelligence on earnings calls. Between the optimism surrounding us and the earnings growth we are seeing, the S&P 500 is currently trading at 20.5 times its 12-month forward earnings. There are a few things about this that may make you cautious.

First of all, if you’re old enough to remember the mid-to-late 90s, you remember the dotcom hysteria. A simple mention of adding a website to the company’s business plan was good at a certain multiple of the stock price. While the internet revolution has certainly changed the world and, in turn, business valuations, that doesn’t mean it hasn’t gotten ahead of itself when it comes to valuation effects. Investors caught up in the euphoria of the era paid the price when the Nasdaq Index fell more than 39% in 2000, another 21% in 2001 and 31.5% more in 2022, lowering the index from almost 4,100 to 1,335. This the lesson stuck with many of us, and when we see similar euphoric reactions to artificial intelligence, we start to have flashbacks.

The second aspect is the more measurable one, i.e. valuations. Over the past five years, the average 12-month forecast price-to-earnings ratio for the S&P 500 is 19.2. Over the last ten years, the average has been 17.8. At 20.5 we are well above both of these levels. Average is just average. Nevertheless, the price-to-earnings ratio is a fairly simple metric. They consist of only two things: price and earnings. With first-quarter earnings season almost here, further price increases will only stretch this number even further. This doesn’t mean prices can’t rise; however, it places greater emphasis not only on next quarter’s earnings, but also on any mid-quarter updates. Ultimately, earnings drive share prices and have supported share price growth so far this year. Still, as valuations stretch, share prices become more vulnerable to a shock if the earnings picture deteriorates at all.

Other stories in the news this morning include news that Conoco Phillips is in talks to buy Marathon Oil
Marathon oil
. In pre-session quotations, Maraton’s shares increased by over 6%. On the healthcare front, Merck is in advanced talks to buy Eyebiotech, maker of Restoret, a treatment for age-related macular degeneration, for $1.3 billion. Finally, American Airlines shares fell nearly 9% in pre-market trading after the company lowered its sales forecast and earnings forecast for the second quarter. This news confirms my earlier statement about the importance of mid-quarter earnings updates and the importance of earnings impacting stock prices.

After today’s Salesforce shutdown
Sales force
Inc. is scheduled to release its earnings report. Then both Best Buys tomorrow before opening
Best offer
and Foot Locker
Foot cabinet
are to report. I’m interested in what all of these companies have to say, but I’m particularly interested in Salesforce and Best Buy. As I mentioned, IT and consumer earnings were very strong this quarter, and with only a few companies left to report, more emphasis can be placed on their earnings. As always, I will stick to your investment plan and long-term goals.

comment Tastetrade, Inc. is for educational purposes only. This content is not, and is not intended to be, trading or investment advice or a recommendation that any product or investment strategy is suitable for any person.